All Those Accounts Receivable are not Impressive

In a series of articles I’ve been focusing on how to manage cash and how managing assets, expenses, and liabilities impact it. Now I want to be a little harsh in one particular area.

Receivables are Every Where

Perhaps when you look at your financial statements and see accounts receivable that represent 70% or more of your current assets you are impressed. Should you be? I’ve seen too many companies struggle with past due accounts receivable, so from my perspective all those accounts receivable are not impressive. Oh sure, it may be a big asset on your books, but if you cannot collect them in a timely manner or even at all then what good are they? Even if you are able to obtain an asset-based against them, if you never collect them how do you plan to pay back the loan.

Take a Look at the Age of Receivables

If you have a large receivable balance and the average days outstanding are 30 or 45 days and that is well within the norm for your industry, then fine, your big receivable balance means something to me. On the other hand, if they are 60, 90, 120 or more days past due and the average days to collect for your industry is 45 days, then in my mind all those accounts receivable are not impressive. In fact, they may just be a disaster waiting to happen. What do I mean by that? Well, if you can never collect them then you’re worse off than if you had never made the sale. You will have spent money on things like inventory and labor to fulfill the sale and then more on people trying to collect and you have nothing to show for it. That doesn’t sound like a great arrangement to me and I don’t think it does to you either.

Approach the Granting of Credit with Caution

When you are considering extending credit to a customer, be sure to do your due diligence in assessing their credit worthiness. If you want a sale so bad that you are willing to grant credit to a high risk customer, then I encourage you to read the previous paragraph. All you’re likely to end up with is a large receivable balance and likely a bad debt. So I say again, all those accounts receivable are not impressive unless you can convert them to cash.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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